DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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With the advancement of technology happening every day, it is essential for all the things in the world to catch up to the same pace and cryptocurrency is no different. In order to accommodate the influx of new people to the crypto world, all the platforms have to be up-to-date.
Although, you will often find that some blockchains fall behind while trying to give their best to the public. Scalability is a big issue with some of these blockchains nowadays. And that is why Layer 1 and Layer 2 solutions come into the picture.
This article will take you through all the things you need to know in order to understand the difference between Layer 1 and Layer 2 scaling solutions. So stick around and find out how the scalability issues of a blockchain are resolved.
Before we get to explaining what Layer 1 and Layer 2 scaling solutions are, you must understand why these solutions are needed in the first place. With millions of users using platforms like Bitcoin and Ethereum blockchain, a huge amount of transactions take place in a short amount of time.
These blockchain networks have to be well equipped to carry out and execute these transactions as soon as possible so as to not make the users waste any of their time by waiting. If the users have to wait too long, the network might lose popularity.
When it comes to Bitcoin or Ethereum, the transaction speed that they offer is very limited. Bitcoin can only carry out 3 to 7 transactions per second and Ethereum carries out 12 to 25 TPS.
So when a huge amount of transactions are requested at the same time, the blockchain fails to deliver. That is when scaling solutions are needed to help maintain and improve the efficiency of a blockchain. Let us understand what these scaling solutions are and how they work.
In a Layer 1 scaling solution, changes are made to the protocol of the blockchain network to make it function better and thus, increase its efficiency. Consensus protocols get used often to improve the blockchain. The blockchain developers implement these protocols in the main network to resolve the scalability issue.
The two major Layer 1 Scaling solutions are:
A number of blockchains utilize the Proof-of-Work consensus mechanism to execute all the operations happening on the network. But blockchains like Ethereum have started to move on to some improved versions of consensus mechanisms like Proof-of-Stake. The Ethereum 2.0 will use the PoS mechanism.
In a Proof-of-Work mechanism, the miners solve all the blockchain equations using computers. Although the Proof-of-Work mechanism is pretty secure, it can be slow and that is why Bitcoin and Ethereum face the issue of a very low TPS speed.
Whereas, with PoS, the users can stake coins like ETH and the PoS mechanism would give enough incentive to the validators to help make the network secure and less risky.
Sharding is another Layer 1 solution that is pretty popular. A lot of projects are working on this scaling solution. In a traditional blockchain network, all the transactions are processed one after the other and that is the reason why it may take a lot of time to execute them all.
But what happens in sharding is that the network breaks the transactions into sets of data which are called shards. These shards are then processed parallelly to each other, making the whole process much faster.
One of the biggest advantages that the Layer 1 solutions bring to the board is that there is no need to make any additional changes on top of the existing blockchain network in order to implement the scaling solution. You only have to make certain changes to the existing blockchain and voila!
The biggest disadvantage of the Layer 1 scaling solutions is that even though they make the network better, they still fall behind when it comes to reaching the ideal TPS speed. Although, Ethereum 2.0 claims that it will have a TPS speed of around 100,000.
Other than that, when you try adding more protocols to the existing blockchains, it might complicate the code even more which could give rise to some unforeseen circumstances as well.
The Layer 2 scaling solutions are those where a new blockchain is created on top of the already existing blockchain which runs parallel to it. This new blockchain is called the child network of the parent blockchain as it is smaller and newer.
These new chains work in tandem with the main blockchain and help them carry out the transactions at a much higher speed, hence solving the scalability issue. Let us see the types of Layer 2 solutions.
Rollups execute all the transactions on the newer chain and not on the main network and then transfer the data to the main chain. They use a validating system to negate frauds. There are 2 types of Rollups: i) Optimistic Rollups and ii) Zero-Knowledge Rollups.
Sidechains are used for a big batch of transactions as they confirm the batched transactions for the main network. They use 2-way bridges to become compatible with the main chain.
The Plasma chains are anchored to the main blockchain and they take the load off the main blockchain and they have their own mechanism like Sidechains to verify transactions and prevent frauds.
Channels are a platform where the 2 parties involved in a transaction communicate with other and carry out their transactions over that. The data of the transactions are then relayed to the main blockchain.
The Layer 2 scaling solutions are widely popular because they do not interfere at all with the main or parent blockchain, they just work parallel to them. These solutions also have a lower transaction fee. Layer 2 solutions carry out microtransactions as well and they don't waste any time while doing so.
Even though Layer 2 scaling solutions might offer some better deals than the Layer 1 solutions they will still fail to solve the scalability trilemma. The Scalability trilemma is when a blockchain has to optimize itself but has to choose two things amongst Scalability, Decentralization, and Security.
Even though the Layer 1 and Layer 2 Solutions offer certain improvements, they will still fail to solve all the issues a blockchain faces. In order to resolve all these issues, a blockchain would have to be made from scratch which will have all these solutions ingrained into it right from the start.
We hope this article helped you understand the differences between Layer 1 and Layer 2 scaling solutions. If you want to find out more about Layer 2 solutions or some other topics related to the crypto world, do check out our website.
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